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Management in Practice

Can an international perspective help create a value-based health system?

International comparative healthcare is a largely untapped field. Health policy researcher Jennifer Baron '05, describes programs that suggest steps toward aligning incentives for all participants around value judged on health results. Even looking at countries that provide near-universal access to care, she finds that a comprehensive value-based system doesn’t yet exist.

The healthcare debate in the United States is focused largely on insurance coverage and access to care. With 47 million uninsured people, the problem warrants substantial and immediate attention. Universal coverage is a key aspect of a value-based healthcare system, or a system in which the incentives of all actors are aligned around improving patient outcomes achieved per unit of cost.[2]

Many countries, particularly in the European Union, provide universal access to care through a variety of models. Given other nations’ successes in this area, it is natural for the U.S. to look abroad for guidance.

Germany, for example, has a mixed public and private health insurance system that covers virtually everyone. In the Netherlands, a recent insurance mandate has resulted in over 98% coverage by private for-profit and nonprofit insurers. [3] The Swedish healthcare system provides universal access to care that is primarily publicly funded and provided. There is no formal insurance, aside from private supplementary plans. [4] Not only do these countries cover almost everyone, they do so for around two-thirds of U.S. healthcare spending as a percentage of GDP.[5]

From a U.S. perspective, these scenarios sound too good to be true, and indeed there are many social and economic gains derived from universal coverage. Upon closer examination, however, underneath the diverse coverage and funding models lie surprisingly uniform care delivery systems. In spite of universal access to care, these countries face many of the same problems found in the U.S.: fragmented provider systems lack adequate patient volume for many conditions; reimbursement methods reward treatment instead of health; health information technology is absent or uneven; and variable care and results are coupled with a lack of transparency. Costs, while still well below U.S. levels, are rising, and aging populations threaten to accelerate the trend.

The unfortunate truth is that no single country has found “the answer.” There is no ideal model to emulate. Yet many nations have demonstrated leadership in certain areas beyond universal coverage. There is much to be learned from these examples, three of which are described below.

Risk Adjustment

A major problem plaguing many healthcare systems is the incentive for insurers to “cherry pick” healthy subscribers. In Germany, for example, insurance premiums are income-based but each plan sets its own contribution level (in 2007, contributions varied by approximately 4.5% of income across plans).[6] Plans with wealthier subscribers therefore generated additional revenue, which could be used to offer lower rates. In 1994, a risk equalization system was introduced to mitigate the incentive to enroll healthier, wealthier members.[7] Each plan transfers the bulk of its collected premiums to a central pool that redistributes the funds to plans according to their members’ age, gender, and disability status.

But wide clinical and cost variation exists within the blunt category of disability, and plans were often inadequately compensated for serving their least healthy members. Moreover, plans providing comprehensive care for the chronically ill would thereby attract more such enrollees, magnifying the potential financial losses.[8] In 2002, a high-risk pool was created to reimburse a portion of the annual cost of care for individual members whose expenses exceeded a fixed benchmark (around €20,500 in 2006). Still, healthier subscribers often remained the most lucrative.[9]

Today, Germany is pioneering a risk-adjustment system that seeks to address the lingering bias toward selective enrollment. A morbidity-adjusted risk pool that would incorporate up to 80 chronic conditions into plan reimbursement is planned for 2009. The additional compensation for each chronically ill member would be based on the estimated cost of care for that condition. Under such a system, plans could succeed financially by providing efficient and effective care for those who need it most. And plans demonstrating excellence in caring for the chronically ill could develop plans specifically targeting those populations without economic penalties.[10]

Bundled Pricing

Even the German system, however, is based upon a reimbursement model that rewards treatment rather than health. Providers that spend more are typically paid more, as future payments are based in part upon historical costs.[11] But more care is not always better care. When each provider treating a single individual’s medical condition is paid separately, the services delivered do not necessarily work together in a way that leads to the best patient outcomes.

In 2005, the Netherlands launched a reimbursement system for hospital and specialist care to promote provider collaboration while improving pricing transparency. Under the new system, insurers pay a single price for all in- and outpatient activities required to manage an episode of care for a particular condition, or “Diagnosis Treatment Combination” (the Dutch acronym is DBC). For example, in the case of a patient requiring surgery for knee arthrosis, the DBC would cover not only the operation and hospital admission, but also pre-admission outpatient consultations, x-rays and MRIs, lab tests, and physiotherapy in one lump sum.[12]

Prices for most DBCs are set by the government and fixed for all hospitals.[13] Pricing for 10% of DBCs is deregulated, and providers negotiate their rates with insurers. The deregulated category includes primarily elective and outpatient care, accounting for roughly 8% of annual hospital expenditures. Plans are underway to expand the proportion of deregulated DBCs, allowing additional freedom in pricing.

Issuing a single payment for care minimizes the incentive to deliver additional, unnecessary services. The model also encourages clinical teams to work together to deliver the best possible patient results. For the DBCs with flexible prices, efficient providers will become attractive to insurers, and more patients will be seen by those clinicians. Higher patient volumes will allow efficient providers to grow, enabling not only cost-effective equipment utilization, but more importantly hiring and training outstanding teams skilled in caring for particular conditions. Through provider experience, scale, and learning, this type of virtuous circle can improve patient results while increasing efficiency.[14]

Results Measurement

The hope in the Netherlands is that the DBC system will lower costs, or at least slow the rate of increase, while improving care delivery. It will be relatively easy to ascertain whether costs do in fact decline. But how will success be measured in terms of higher-quality care?

Results measurement should be the bedrock of every healthcare system. Massive financial and human resources are dedicated to improving health throughout the globe, yet failures and successes are often not clearly defined. Many providers delivering poor results do not know that the care is sub-standard. And clinicians providing excellent care may not know how well they are performing.

In Sweden, over 60 quality registries track treatments and outcomes for common procedures and conditions. For example, the National Stroke Registry tracks 37 variables in the acute phase of stroke care, and 26 measures during 3-month follow-up assessments.[15] Metrics include structure and process measures linked to positive outcomes, such as time to hospital, treatment in a special stroke unit, and lipid-lowering therapy.

Although providers submit data voluntarily, participation is nearly universal. Many new registries are created each year, and existing registries continue to refine their measures and increase transparency of results. Many registries issue public data summaries or post results online, while others share the information only with participating providers. Of the registries with public reporting, most present the information in aggregate at the county or other geographic level. As Swedes typically receive care within their counties of residence, that level of information is minimally helpful in terms of directing patients to high-quality providers. (Although notably, the information is still quite useful to the providers who receive it, allowing them to identify areas of excellence and places to improve.) Some registries have meaningfully increased the transparency of reporting, including the Hip Arthroplasty Registry which posted provider-level data on its public website for the first time in 2006.[16]

The above examples are just three among many positive steps being taken by health systems throughout the world. While these initiatives are not perfect, they illustrate the types of policies that can result from value-based thinking. Countries currently working to restructure their own systems would be well-served to examine and build upon other nations’ strengths and accomplishments while learning from their failures. However until recently, in-depth study of comparative healthcare systems has been relatively minimal, leaving many successes unknown while missteps are replicated.

Ultimately though, a comprehensive value-based health system structure remains elusive in practice. Many promising initiatives have been pursued in one-off, incremental fashion, leaving the majority of the healthcare system untouched. Other efforts have consisted of insurance reforms aimed at short-term cost reduction while largely ignoring the effects on the results of care. Few reforms have addressed the actual structure and organization of healthcare delivery, the level at which value is actually created.[17] With healthcare reforms underway in countries across the globe, the time is right for nations determined to create truly successful systems to explore comprehensive, value-based models that align the success of all participants with delivering effective, efficient health results. These models should combine positive aspects of health systems around the world with new elements in innovative ways to blaze an original path.

For more on value-based healthcare, read Q3's interview with Harvard Business School competitive strategy expert Michael Porter.

1 The term "value-based" in the title refers to frameworks and concepts from Porter, Michael E. and Elizabeth O. Teisberg, Redefining Health Care, Harvard Business School Press, 2006

2 Porter and Teisberg, 2006

3 Wynand P.M.M. van de Ven and Fredrik T. Schut, “Universal Mandatory Health Insurance in the Netherlands: A Model for the United States?” Health Affairs, Vol. 27, No. 3, May/June 2008

4 Porter, Michael E. and Jennifer F. Baron, “The Swedish Health Care System: A Value-Based Perspective,” unpublished draft, May 2008

5Chart 2: Health Expenditure as a Share of GDP, 2006 OECD data

6 Systems in Transition: Germany, 2004; Standardization of income-based premium levels across “statutory” public plans is scheduled for 2009

7 Porter and Guth, Health Care 2008

8 Gopffarth, Dirk, “Reforming Germany’s risk structure equalization scheme – taking stock at the halfway point,” Journal of Public Health, July 2005

9 Porter and Guth, 2008

10 Gopffarth, 2005

11 Porter and Guth, 2008; hospital reimbursement is determined through a fixed national weighting for each DRG, multiplied by a hospital-specific base rate that is negotiated between each hospital and the health plans. Hospital base rates consider historical cost. State-level price convergence across hospitals is planned, and national price convergence has been identified as a future goal

12 Oostenbrink, J.B. and F.F.H. Rutten, “Cost assessment and price setting of inpatient care in the Netherlands. The DBC case-mix system,” Health Care Management Science, 2006

13 Porter, Michael E. and Philipp Jan Flach, “The Dutch Health Care System: A Value-Based Perspective,” unpublished draft, February 2008

14 Porter and Teisberg, 2006; see also Porter, Michael E., “Value-Based Health Care Delivery,” slide #16, presentation at Harvard Business School, June 10, 2008

15 Porter and Baron, 2008; see also National Stroke Register homepage

16 Porter and Baron; see also The Swedish Hip Arthroplasty Register: Annual Report 2005, Department of Orthopedics, Sahlgrenska University Hospital, August 2006

17 Porter and Teisberg, 2006